Weight Watchers (WTW) posted a slamming quarter this morning, the classic beat and raise, blowing away Street estimates. Shares are indicated to open higher by more than 11% this morning, light pre-market volume, but looks like it will be a big winner today.
On February 14th, Monday, I noticed very unusual action in the Weight Watchers (WTW) call options and put out the following note to subscribers:
“Weight Watchers (WTW) touching new highs today on big volume into earnings on 2/17 and call volume of 6,764 is 25X daily average, a block of 4,273 bought at $0.95 and more than 5,450 trading as opening buys in the February $45 calls, OTM with shares at $44 and Feb IV up 20% on the day. Put volume in non-existant and shares have been on quite a run on building volume lately, maybe due to the failure of all the diet pills with the FDA denying all parties. There was also substantial accumulation with big blocks of shares this morning. The $3.25B Company has also frequently been noted in takeover chatter, shares trading 15.9X earnings and 2.3X sales, not a bad value. Shares rose on 12/7 with BofA raising it to Buy with a $48 target. Weight Watchers has not been exactly blowing away earnings of late, but maybe the New Year brought about more business with obesity a continued concern in the US and abroad, although April tends to be the best month for shares.”
Another 1,360 of these calls traded yesterday and the March $45/$50 calls also attracted some unusual activity.
Those $0.95 calls will be worth more than $6 today, more than a 500% return over the course of 3 days, and nominal more than a $2.15M profit.
Now that is a fat pay-day, but making a directional bet of that size the week of options expiration has me thinking someone had some insider information on the earnings number.
In the first three minutes of trade today I saw big blocks buying the February $22 calls in Corning (GLW) at $0.42, offer side buying and soon that swelled to 5,000 contracts (More than 8,000 traded by day end). Shares opened quietly but started to make a run soon after, sending the calls for $0.42 up to $1.15 just before 3pm, an easy trade for an option scalper, nearly a 200% gain intraday.
I’ve come to learn that often the hottest action in the first 15 minutes in the options market tends to be the best for day trading options, and this is just an example of something seen most every day where there are opportunities to flip options intraday for 100%+ gains, especially near option expiration when much of the premium has been sucked out of these names that have very liquid trading and $1 strike increments.
Whole Foods (WFMI) was set to report earnings on February 9th after the close and I had a good feeling it would continue its momentum from strong earnings last quarter, and also felt the options market was not pricing in enough volatility, seeing it as a stock that had consolidated with tight Bollinger Bands and ready to explode. I was closely following the options activity leading up to earnings and although more than 10,000 March $50 puts accumulated the action looked to be hedging as all the large blocks of stock were being bought right alongside. Also, I was seeing accumulation in May $60 calls, far OTM calls that are seeing a positive move coming. On a fundamental basis, shares do trade at a premium to other grocers, but they should with the growth and ability to pass on rising commodity costs to a more affluent customer base. The Street was also seriously under-estimating Whole Foods with most price targets sitting below $50. I now see shares as fairly valued, trading at the 10 year average P/E of about 33X. Same store sales rose at an impressive 9.1% in the quarter, and there is plenty of room for expansion going forward.
Directional bets can be dangerous on big earnings movers so I went with a more neutral strategy despite my positive inclinations. I decided to have my clients put on the February/March $60/$48 double calendar spread at $0.87, selling the February $60 calls and $48 puts to buy the March $60 calls and $48 puts. I chose these strikes because I felt these front month options were the most “juiced” with premium and was also my target moves for a beat/miss. The strategy is effective especially with less than a week left until options expiration when the front month IV is at a wide spread compared to the next month out.
Whole Foods delivered a stellar quarter and shares shot higher, reaching highs of $60.94 and settling Friday at $59.67 on the close. I decided to take profits mid-day on Thursday closing the spreads at $1.32, a 51.72% gain overnight. Not the biggest return, but a great execution of a neutral strategy and using options to effectively trade earnings.
A diagram of the original strategy P/L is below (ThinkorSwim Analyze Chart):
For a look at some of my recent earnings previews and along with option trading strategies, most of which were a resounding success, please visit (Scroll to Bottom of page): http://optionshawk.com/index_files/optiontrader.html